Pricing
Pricing Objectives
Pricing Methods
Pricing Strategies
Can Firms Control Their Prices?
Supply and demand
Price and non-price competition
Buyer’s perception of price
Pricing Objectives
Survival
Profit Maximization
Target Return on Investment (ROI)
Market Share Goals
Status Quo Pricing
Pricing Methods
Cost-based pricing
Demand-based pricing
Competition-based pricing
Cost-Based Pricing
Markup – price is determined by adding an
amount to the wholesale price
Markdown – subtracting an amount from
the retail price
Markup & Markdown
Giant Eagle buys artichoke hearts for $1.77
a can and wants to add 40% to the
wholesale cost, what would the retail price
be?
Giant Eagle sells olive oil for $10.50 a
bottle and wants to mark down the price
20%, what would the markdown price be?
Advantages & Disadvantages of
Cost-Based Pricing
Advantages: Disadvantages:
Easy to apply Difficult to determine
Commonly used by an effective markup
retailers and percentage
wholesalers Separates pricing from
other business
functions
Breakeven Analysis
Answers the question, “What is the lowest
level of production and sales at which a
company can break even on a particular
product?”
Breakeven quantity – the number of units
that must be sold for the total revenue to
equal the total cost (for all units sold)
Breakeven Analysis
Breakeven Analysis Fixed costs – $40,000
140000
Variable costs – $60
120000 per unit
Cost/Revenue
100000
80000
Selling price – $120
60000 per unit
40000
20000
What is the breakeven
0 quantity?
0 500 1000
Quantity (Units)
Demand-Based
Pricing that is determined by how much
customers are willing to pay for a product
or service
This method results in a high price when
demand is strong and a low price when
demand is weak
May be differentiated based on
considerations such as time of purchase,
type of customer or distribution channel
Advantages and Disadvantages of
Demand-Based Pricing
Advantage: Disadvantage:
Potential for higher profits Management must be able
to estimate demand at
different price levels,
which may be difficult to
do accurately
Segments must be
separate enough so that
those that buy at lower
prices can’t sell to those
who buy at higher prices
Competition-Based
Pricing that is determined by considering
what competitors charge for the same good.
Once you find out what your competition is
charging, you must determine whether to
charge the same, slightly more, or slightly
less.
Pricing Strategies
Psychological pricing
Product line pricing
Promotional pricing
Discounting
Psychological Pricing
Odd-number pricing
Multiple-unit pricing
Reference pricing
Bundle pricing
Everyday low price (EDLP)
Customary pricing
Product Line Pricing
Establishing and adjusting the prices of multiple
products within a product line
Captive pricing – basic product low, but items
required to operate or enhance it can be at a high
level
Premium pricing – highest quality or most
versatile version is given the highest price
Price lining – setting a limited number of prices
for selected groups or lines of merchandise
Promotional Pricing
Price leaders
Special event pricing
Comparison discounting
Discounting
Trade discounts
Quantity discounts
Cash discounts
Seasonal discount
Allowance